Question

A short seller has sold 300 shares at $210 per share with an initial margin of 60%. A few days later the stock paid $4 dividends per share. What is the profit to the short seller if the share price is now $180? 10,200 7,800 9,000 -10,200

Answer 1

By extracting the information:

Shares sold by short seller = 300

Price per share = $210

Dividend paid per share = $4

Current share price = $180

Calculate the profit to the short seller:

Step-1:

Proceeds from short-sale = Number of shares sold x price

By substituting the values:

Proceeds from short-sale = 300 x $210

                                = $63000

Thus the proceeds from sales is $63000

Step-2:

Proceeds from current sale = Number of shares x Price

By substituting the values:

Proceeds from current sale = 300 x $180

                                             = $54000

Thus the proceeds from current sale is $54000

Step-3:

Dividend paid = Number of shares x Dividend per share

By substituting the values:

Dividend paid = 300 x $4

                      = $1200

Thus the dividend paid is $1200

Step-4:

Profit to the short seller = {(Proceeds from short sale – Proceeds from current sale) – Dividend paid

By substituting the values:

Profit to the short seller = {($63000 - $54000) – $1200

                                       = $9000 - $1200

                                      = $7800

Thus the profit to the short seller is $7800

Thus option (B) is correct